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Managing the Risks in That Great Franchise Opportunity

February 9, 2010

From community  By CaronBeesley

A new year brings with it new opportunities – not least of which occurs in the franchise industry. In fact, for every eight minutes of every business day a new franchise business opens – quite a statistic.

And it’s easy to see why – franchisors and franchise associations are very good at persuading would-be franchisees that franchising is generally a lower business risk, than independent business ownership. But is it? Ask any franchising expert or experienced franchisee and you might hear a different story.

Going Beyond the Hype

In “*The Truth About Franchising” business strategist coach, Mark Munday, discredits much of the reported “hype” surrounding entrepreneurial franchise success rates.

Munday points to research by Timothy Bates, a Wayne State University Economist, which concludes that

“… After four years, only 62% of franchised businesses had survived, while 68% of independent small businesses were still open for business.”

His report goes on to suggest three “harsh realities” as to why franchisees fail:

  1. Franchisees struggle to make a profit – especially after taking into account the initial purchase price of the franchise opportunity.
  2. The “hype” and marketing messages used to sell franchises are paid for by franchisors themselves and are therefore biased and subjective. This makes getting hold of the information you need to make a sound business decision difficult.
  3. Franchise agreements favor the franchisor.

Managing the Risk -Tips to Help You Assess Your Readiness to be a Franchise Owner and Find the Right Franchise for You!

Becoming a franchisee is just as risky as starting your own independent business, if not more.  Getting started is going to require quite a bit of research, planning, and due diligence to get you beyond the hype and misleading claims of franchisor marketing.

With a picture of the “harsh realities” of franchise ownership in your back pocket, take the next step beyond the hype by building a picture your own readiness to become a franchisee. Assess potential franchise opportunities; and equip yourself with an understanding of what the law can do to ensure your interests are protected.

Here is a collection of expert advice (largely drawn from fellow blogger *Joel Libava, otherwise known as “*The Franchise King“) to help you on your way:

  • Are You Ready to be a Franchise Owner?

It takes a particular personality to be a successful franchise owner. More than just a risk-taker, you need a “franchise personality”, or as Joel Libava explains “…the type of personality that is OK with rules“. For example, not only must you follow the franchisor’s operations manual, but you’ll also have to pay a certain percentage of your gross sales revenues to the franchisor! Read more about the rules that you must follow, as well as those the franchisor has to follow in Joel’s article: “Do You Have That Special Personality Needed To Be A Franchise Owner?“.

  • Understanding the Types of Franchise Opportunities Available

It’s fairly easy to search for franchise opportunities. For example the International Franchise Association offers a “*Find a Franchise” search tool allows you to search based on industry, location, financing, etc. Many would-be franchisees choose their franchise type based on marketing by the franchisors – many of whom market their franchises with a certain demographic in mind, to the exclusion of others. For example, some franchise concepts specifically target men, when in fact women would be just as skilled in executing the franchise strategy.

To get yourself thinking about the types of franchise opportunities available to you (advertised or not), read Joel Libava’s “The Franchise Business Model: Opportunities Galore for Women” (and just in case you feel excluded, Joel’s article does apply to men, too!)

  • Finding the Right Franchise – Using a Little Detective Work and the Law!

How do you know when you’ve found the right franchise for you? Read more about the vital key indicators that will help you know when you’ve found the right franchise in my earlier article, “Investigating a Franchise Opportunity – How a Little Detective Work and the Law can Help“. You’ll also learn about what the law requires to help you make informed decisions about a particular franchise (including financial statements, contact information of other franchisees, and so on), in addition to steps that you can take to assess a franchise opportunity.

  • How Much Should You Invest in a Franchise?

Read more about assessing your net worth; the factors that determine how much money you can actually make from a franchise; and a good rule of thumb for how much you should invest in a franchise opportunity in Joel Libava’s article: “Franchise Opportunity Exploration Starts at the Kitchen Table“. As Joel explains, “When you buy a franchise, *in every case except one, the amount you invest does not have a direct bearing on what your potential income will be. In other words, there is no automatic correlation between what you invest in a start-up franchise, and what type of profit you can expect.”

Additional Resources

*Note: Hyperlink directs reader to non-government Web site.

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